Jack Henry & Associates, Inc. (JKHY) Earnings Call Transcript & Summary

For our next session, I'll be moderating it. I'm Vasu Govil. I'm one of the analysts on KBW's payments and consumer finance research team. I cover the payments and core processing space, and I'm very excited to have with me David Foss. He is Chairman of the Board and CEO of Jack Henry. We're very excited to have you back. And so thank you for joining us.

Thank you. I'm happy to be here.

Great. So we've been starting off all these sessions, which are the macro question, which is on everyone's mind, and I know you guys altered your outlook a little bit at the recent earnings call? And I think the biggest driver was that you're seeing a shift in spending away from debit cards towards credit. So just if you could maybe help flesh that out. We've seen some Visa, MasterCard data, but it didn't seem like they had decelerated fair amount, but if you could just help us flesh that out and what you're expecting on a go-forward basis.

Yes, there are a couple of -- actually a couple of things in that change in guidance. One of them was the lack of deconversion revenue. And so for those who don't know about our space, we -- our business is primarily providing technology to community and regional financial institutions, banks and credits in the United States. And so when a bank gets acquired, they essentially buy out their contract with us, that creates what's called deconversion revenue. And so we try to call that out every quarter, make sure people understand what's happening as far deconversion revenue. It's always -- I phrase it -- the revenue you don't want to see. When deconversion revenue happens, it's because the customer has been acquired, so you don't want to see that revenue, but it is revenue. So it's -- as a GAAP reporter, we're obviously obligated to share that information. This quarter was -- or this second half of the year has been interesting because essentially M&A has stopped in our space in the banking space. And Tom has been very clear in communicating that to the industry, the fact that M&A is really not happening in our space. So that means there's a reduction in deconversion revenue for somebody like us. But was really unique for us in this period was -- on the November call, I was asked, do you guys have visibility into deconversion revenue for the remainder of the year? And my answer was yes. At the time we had that visibility. We don't normally have a lot of visibility because we don't know when a bank is going to be acquired. But we had visibility at that time. But then what happened was between the November call and the February call, there was 1 bank, 1 -- only 1 bank that we thought was deconverting. The acquirer came to us and said, we're going to hold off because we may end up converting our bank to Jack Henry as opposed to converting them off of Jack Henry. So the ironic thing for me was we had to lower guidance because this revenue that we thought was going to come in isn't coming in, and it was revenue tied to a customer who is going to leave and now we actually may win the acquiring bank to Jack Henry. So that was the primary shift in guidance. The other thing that I highlight though was we -- when we issue guidance, we issue annual guidance. So we did it in August. Back in August, we saw -- we were projecting forward, we saw a fairly significant increase in debit activity on our debit platform. We're a large debit issuer -- and so at the time, we were projecting for the year a real significant increase in debit activity. And in fact, we have seen a significant increase, but what we're seeing is not quite as significant as what we thought. And so our forward-looking in August was this. Now we're seeing it as this. That required us to kind of explain a little what's happening. Well, in our relationships with Mastercard and Visa, what we have learned from them is there is a little bit of a shift. So it's not a huge change, but a little bit of a shift from debit to credit. And that's because a lot of consumers had a lot of stimulus money in their accounts, and they were working off that stimulus money using their debit card. And now as the economy has been a little challenged, some people have eaten up that stimulus money, but there's been this slight shift to credit forward-looking. It's not about the quarter. It's what are we looking at for -- looking forward, and so as we were listening to and learning from Visa, Mastercard with their direct-to-consumer business, us as a B2B provider, and we were anticipating that, that would slow just a little bit. And so that required us to change guidance on that piece of our business as well. So no major shift, no major changes. And like I say, the ironic part about the deconversion revenue is it's actually really good news for our company, but it is revenue that's potentially going away because of that change with that 1 customer.

Got it. So how do you sign that customer at this point?

No. So that's the thing. Once you start a process like that, it's normally about a 9-month review, and so we are -- they notified us in January that they were going to hold off and do a review. So I wouldn't expect that we will know for several months whether or not they're actually going to move to Jack Henry or are they going to go ahead and deconvert that acquired customer.

I guess that's a good problem to have.

It is a wonderful problem to have.

Yes. So I guess then diving into bank tech spending environment because that's always a topic of interest. And you recently talked about how banks are continuing to invest macro uncertainties or notwithstanding. Can you talk to us about what you're hearing from the banks sort of what are the biggest focus areas for them? And will -- and do you think the spending will stay sustainable even if we start to see some macro softness?

Yes. So it's an interesting topic. One of the challenges that I had this year, normally on earnings calls, I try to help our investors get an understanding of what we're seeing in the industry. So normally, on the earnings call in November and February, I try to share industry survey data about the expected spending projections for the coming year. This year, the 2 primary sources that I normally cite, neither one of them did that survey this year. So what I had to do is kind of take some smaller surveys and kind of compile anecdotal data. I hosted, just a couple of weeks ago, a CEO roundtable with a bunch of CEOs of banks larger than $2 billion in assets. Some are Jack Henry customers, some were not, just had a group there. So I was able to pull them. It's already -- it was in January. So they already had their budgets in place. I polled them and I've talked to a lot of other CEOs about what their expectations are. And the average that I'm kind of settling on is about 7% increase year-over-year in tech spending for most of the customers in our space. That's a pretty good number. Last year, the projection was 7% to 10%. The year before that, it settled in at around 5%. So we've been -- we're on a pretty good pace here at 7% year-over-year tech spend increase. What are they spending money on? So first off -- and by the way, for Jack Henry, our sales pipeline, as I sit here today, is larger than it's ever been in the history of the company. And that's coming off a record-setting Q2 -- fiscal Q2 for us. The December quarter was our Q2, set an all-time sales record in December. So to be sitting here now with a pipeline that's larger than we've ever had in the history of the company, that's a pretty good indicator of interest, specifically in Jack Henry, but hopefully in the industry. So what they're spending money on, lots of interest in upgrading their back-end systems. So their core system. We have a large number of prospects on the core side. But then most banks and credit unions today are trying to figure out how to upgrade their digital presentation layer to their -- to their customers. And so one of the things to emphasize that, I usually challenge groups. I'll say, I don't know who you bank with. I don't care who you bank with. But think about this for a moment. When you sit down at your PC today, chances are your experience interacting with your bank is different from what it is on your phone or tablet. It's a different user experience. It looks different. You can do things on your PC, you can't do on your phone, chances are for most of you, that's true. That is what a lot of banks are trying to fix. So we have Banno, our digital banking front end. Banno eliminates that concern. Banno, if you deploy Banno, your experience on your PC, on your tablet, on your phone is all the same. It looks the same, it feels the same. The functionality is the same. So most banks and credit unions in the United States regardless of size, and regardless of who their core provider is, they're trying to figure out how do we get from where we have been to where we need to be to serve our customers better. That's driving a lot of demand for us. It certainly is for others in the industry. But because we have this wonderful digital banking platform, Banno, it's creating a great interest in technology from Jack Henry. Lots of banks and credit unions are looking at efficiency plays. What can I do from a technology point of view that will introduce efficiency into my model? So that's happening. A lot of interest in loan origination -- or account origination, not just loan origination, account origination through a digital presentation layer to help our customers create new accounts without having to go into a branch. And then the topic of fraud is a big broad topic, lots of banks and credit unions trying to figure out what technology should they be deploying to take advantage or to better mitigate fraud. For us, this is great timing because we're just rolling out a new solution called Financial Crimes Defender, brand new ground up, public cloud native platform. And so those are a few things they're spending money on. I could go on, you know me well enough. I could go on for a long time, but -- those are just a few areas that there's a lot of interest right now regardless of what happens in the economy. These bankers are continuing to run their institution, they have to modernize their presentation. They can't just stop because then they lose potentially new customers. So they have to modernize their presentation. They have to take care of fraud. They have to continue to focus on efficiency. All those things create the opportunity for Jack Henry.

Got it. So I guess I wanted to touch on the strong sales pipeline you just talked about. And I think recently, you signed 3 core deals with banks greater than $1 billion in assets. And these are bigger than the average client you have typically signed. I know over time, there's been a focus to move upmarket, but these are sort of bigger. And so I guess a couple of questions. When you sign a deal that size, who are you taking share from? And in terms of what's resonating with these clients? Is it your open platform? Is it Banno? Is it -- what is it that's helping them sort of make the decision that we want to move to Jack Henry company?

Yes. So all of the above, and I'm not going to call out companies by name. We're an equal opportunity share gainer. So we like to take share from everybody in the market, and we do. So Jack Henry on the core side of our business, we tend to sign 50 to 55 new core logos, meaning new customers, new revenue coming to Jack Henry, 50 to 55 per year. I normally phrase it as you can think in terms of one a week. We're bringing a new logo from one of our competitors to Jack Henry at the pace of one a week. That's a real terrific pace for us. We've been on that pace -- pandemic effect kind of hit us a little bit in there. But for about 5 years, we've been on that pace, and I don't see that slowing down at all. That's significant because there's nobody in our industry that's anywhere close to what Jack Henry's at as far as winning new core logos. To your point about us moving upstream, the key thing that I was messaging there was all 3 of them signed on December 30. So that was a really fun day to sign 3 big banks on the same day at the end of the quarter in December. But Jack Henry has had great success in the past few years, moving upmarket. We, by strategy, choose not to serve the largest banks in the country. That's not our market. That's not who we try to sell to. But that middle space, the regional bank space, and the largest credit unions, we are the dominant player among large credit unions, more than 50% of the credit unions over $1 billion in assets, use Jack Henry as their primary technology provider. So we're the dominant player on the code union side, and we're continuing to grow up market on the banking side so that, that middle tier of customers say, $800 million in assets up to $50 billion. We're continuing to grow in that space and establish a dominant position in that space. What attracts them to Jack Henry? Number one, a very focused strategy. So if you look at our product strategy, we are very focused you know that if you're a commercial bank, if you talk to Jack Henry, we are going to sell you a Silver Lake, period, end of story. There's no debate. It was recognized 3 years ago as the best commercial banking platform in the industry. And so we lean on that. If you talk to one of our competitors, there's often a debate. They have multiple cores, and they're not really settled on what is their strategy. At Jack Henry, you know we're going to propose Silver Lake, if you're a large commercial bank. That's where we put our investment as far as technology enhancements on the banking side. And so we have a very focused strategy. Customers know that if they come to Jack Henry, we are committed to those products. We're going to support them on those products. But then we surround those cores with this really wonderful suite of complementary solutions. So we already talked about Banno getting great recognition in the industry as the fastest digital banking platform out there, the most robust as far as functionality. We have features. In fact, it was this conference occurs me now, was this conference last year where you and I were on stage, and I was talking about Banno and how it has changed for bankers, how they interact with their customers because it has features that nobody else in the industry has. So one example I gave was Banno conversations, where you can launch in the application, a conversation with somebody in the call center and you're already authenticated. We know who you are. There's no need to go and verify your identity, so you can share private information and you can have this conversation through the application. Nobody else is doing that. And I got to the end, you and I walked off stage and they were sitting in the front row and a banker, there was a guy in the front row that I recognize, but he was out of place for me. I walk out the stage. He stands up. He's the CEO of a large regional bank, one of our customers, and he was like, what you said on stage was exactly right. And I had a few people from the audience walk up and they wanted to ask me questions about Banno, and he turned to them and said, "Let me tell you about Banno. Let me tell you from a customer's perspective, what this has done for our bank and how this has created opportunities for us to grab and retain new customers." And so that story is out there, and it's a really strong story and it's creating opportunities for us to get into banks because we can enhance their experience for their customers. And then you round that out with the other things that Jack Henry has been investing in with our fraud technology and so on. The other piece is tech modernization. So you alluded to that in your question. We announced a year ago, February this major initiative to move everything we do at Jack Henry to the public cloud environment. And when we announced it a year ago, there were a lot of people that didn't quite understand what we were doing and how we're going to do it. Now a year later, the industry has really grabbed on to what Jack Henry is doing as an innovative approach to solve problems for the future from a technology point of view. And so -- that is definitely getting a lot of attention, and it is driving interest among larger financial institutions. We have banks, $20 billion, $30 billion banks that never would have called Jack Henry 5 years ago to say, "Hey, we need to have a conversation." Today, they are calling us. We're engaged with those customers today or those prospects today because of tech modernization and their understanding that this is really the best strategy for the future, and they can maybe hitch their wagon to that horse. You like that one?

Yes. You sort of answered my next question already, but I have a follow-up on that. So like you said, it's been a year -- I think it was a year ago that you first talked to the Street about your tech modernization strategy. Could you walk us through what you've accomplished in this 1 year? And sort of any milestones that you've hit -- and what's on the goal for the next year or 2?

Yes. So just to bring everybody up to speed. So tech modernization is this idea of essentially moving everything we do to the public cloud environment. Today, we are a major provider in the AWS environment and in the Azure environment, the Microsoft environment. We have -- hopefully, you've seen we signed a partnership with Google about 6 months ago now, made a big announcement. We're doing a lot of work in the Google Cloud, the GCP environment now to transition Jack Henry solutions onto the public cloud. The theory or the primary idea here is that long term, most banks and credit unions are going to want to move their functionality their processing to the public cloud. It allows us to take advantage of all the tools that are available there, not only design and development tools, but also the security infrastructure. and the efficiency of being in the public cloud. So we're in this process. It's a long-term strategy. We're in this process of moving things, rewriting things, not just lift and shift, we're not just taking old stuff and putting it on a public cloud to make it work on the public cloud. We're actually rewriting a lot of our solutions and writing new solutions to be public cloud native. So on the core side, what we announced was we're essentially unbundling the core to create these discrete components that will sit on the public cloud, and our customers can consume them one at a time as we roll them out. So this isn't a big bank conversion. We're not going to work for 6 years on rewriting and then say, "Ta-da, here it is, it's live." We're rolling out these pieces one at a time over the years. so that in several years, a customer can run their entire bank on the public cloud, but they can start to consume pieces over time as we make them available. So the first piece was wires, so domestic wires. We have that now in production with a number of banks running this component on the public cloud. We have several others. I think it's 4 others that are in beta right now, that the goal will be to release those at the end of this year. And then we'll be rolling out more functionality. In total, I think it's 32 different primary components or primary modules within the public cloud that will roll out over the next several years. I will say we have published a road map for our customers. So our customers have access through a secure portal to see what the road map looks like and we're showing the milestones. I had intended originally to publish that publicly, but then we've learned that there are several competitors out there who think what Jack Henry is doing is pretty innovative, and we need to figure out how to match up with Jack Henry's doing. So we've decided not to go public with the road map. A little too much transparency might be bad for our business. So -- but our customers have full access to those road maps, and they have kind of following along as we're rolling out these components.

Got it. Just on the topic of public cloud, I mean banks tend to be conservative. Is that sort of a bottleneck? Or are they comfortable moving their data with the public cloud?

Yes, that's an intuitive question. The answer is no today. They're not comfortable moving to public cloud today for all of their primary data. And the reason is because the regulators won't allow it today. So the regulators -- this has been an interesting journey for us. We've been a public cloud provider now for several years. But when we first started rolling out our digital banking applications, for example, which are totally public cloud native. We had to do a lot of education with the regulators to make them understand what is this environment, how does this work and make sure they could get comfortable regulating or examining providers in that space. And so -- we spent a lot of time with the regulators. We've been down this path before. We know what's required to get the regulators comfortable. But that's going to be an evolution for us and everybody else in our industry. The more we move to public cloud, the more the regulators have to kind of adopt that level of comfort with the exam process. But we're in that game, and we're prepared to help with that. And we see that wave coming in the future. But today, and when I speak about the regulators, by the way, so it's the Fed, it's the FDIC, it's the OCC and the NCUA. We are regulated by them. All of them are in our offices just as they are with any of the other major providers in our space. They're in our offices on a regular base kind of looking over our shoulder and making sure we're doing the right things. And so we believe that this shift is happening. We know there's demand among customers to make that move. But today, almost no bank CEO wants to say, I'm going to go all in on the public cloud because they know they're going to have the regulators all over their back. but it's an evolution that we see coming.

Got it. I guess you talked about Banno a fair amount before. So I had some questions on that. Clearly, you've talked about how Banno is differentiated, but it seems like it's also becoming a very competitive space because like you said, a lot of banks are focusing on digital banking. And so as you go ahead and compete with other products that are offering that, like -- is your win rate high because you're also the core provider in many instances? Or is -- does that help you in any way that your product will be better integrated because you also run the core for these banks?

It helps us certainly the fact that we're the core provider, but the other thing to keep in mind is, and you know this well, we are the most open provider in the industry. We have, for years, had this philosophy where we try to make it easy for other people to connect into our platforms. Our customers love that about Jack Henry. It's one of the things that I think, helps keep them loyal to our company is the fact that we try to make it easy. It's not just us talking the talk. We really walk the walk about making it easy for people to connect their solutions into our platform. . That's why today we have -- well, I announced on the earnings call a year ago, we had about 850 fintechs connected into our open API platform. Today, it's about 950 fintechs. So we've added 100 -- a little over 100 in the intervening year here. And so this commitment that Jack Henry has to be in open and allowing easy connectivity makes it easy for our customers to choose to do business with somebody else. They're not constrained because the only digital banking solution I can buy is the one my core provider has, we try to make that easy. With that said, our Banno solution, we know stacks up really well against anybody in the industry. And so we win based on the merits of that solution, not based on the fact that we're trying to force people into doing business with their core provider.

And is that a revenue opportunity for you still if one of your core clients use a third-party digital bank solution?

Minor. I mean, honestly, when I say we're trying to make it easy for our customers, we're not punitive in our pricing when they hook up to our third-party solution -- into our platform. And I know that whole concept is counterintuitive to a lot of people, they'll say to me, "Well, wouldn't it be better if you -- we made it hard for other people to integrate in, and you could kind of have this captive audience. Maybe, but I guarantee you a big part of the reason people want to do visits with Jack Henry. And the big part of the reason that our customer retention rate is more than 99%, excluding acquisition, more than 99%, a big part of that is the fact that we are the open provider. People recognize that we're trying to help make them successful. We're trying to give them options so they can choose to use whatever solutions they want, and we'll make it easier to integrate those solutions into our platform. So I think for us, that model has worked really well. And by the way, this wasn't my idea when Jack Henry was still alive and running this company, he was the one who said we are going to take a position where we are going to be the most open provider and allow people to connect into our platforms, and that strategy has worked extremely well for us over the years to the point that today we're perceived as a premier provider, and people don't leave Jack Henry once they become a customer.

That's great. You recently talked about not wanting to open up Banno to other core customers -- can you talk a little bit about that sort of why that decision and that limit the growth potential for Banno down the road?

Yes. So this is -- it's pretty ironic that I'm the guy now who's giving this explanation because about 2, 3 years ago, I was pushing our team very hard. We have got to get Banno outside the base. We have a number of solutions that we sell to non-Jack Henry core customers. In fact, we serve about 6,000 banks and credit unions that are not Jack Henry core customers, but they have other solutions from Jack Henry. So there may be a bill pay, they may have bank budgeting, there's all kinds of things that we sell to non-Jack Henry core customers. And that strategy has worked really well for us for a long time because if you start to work with Jack Henry and you're using us for bill pay or you're using us for remote deposit capture or for a fraud solution. You get the relationship with our company and you start to realize, hey, I'd like to maybe do more with these guys. Let's go partner up with Jack Henry to do more. So I've been very adamant for years with our team. We got to get to a point where we can sell Banno outside the base. We are positioned in the fall of last year, we were positioned to start doing that. And what we started hearing and you're hearing this a lot was 1 competitor, in particular, but a couple of competitors, we're going to their customers saying, "Hey, now you'll be able to buy Banno and you don't need to leave your core now. You don't need to go to Jack Henry with your core because you can get Banno and just stay on your core, even though you don't like it very much, you can stay on your core and you'll be able to get Banno without moving to Jack Henry." Well, that wasn't exactly what I was hoping was going to happen. And certainly, here, your competitors telling their customers this it was a moment that I was really surprised by. So we said, okay, we're going to stop. We're not going to sell this outside the base yet. And what we're doing is we're taking a very strategic approach. So there will be certain cores that we will sell Banno to and others that we won't. And there will be some within one of our competitors. They have many cores. There will be some core customers in that base that we will sell you Banno, and there will be others that will say we will not sell you Banno. So we're being very strategic and very kind of pointed about where we're going to sell the solution because we don't want it to hinder our growth as far as the overall relationship with the customer.

That makes sense. If you have to take a guess, I know every bank is sort of moving up this digitization journey. If you had to make a guess of where we are in that adoption cycle.

So back to the example I said earlier, when I challenge all of you to think about whatever bank you have and what your experience is with your bank, I would bet most of you were not in your head going out last way does my bank. What I have on my PC is totally different from my phone. I think we're in the first or second inning of a 9-inning game here as far as the modernization of the digital presentation layer. And I'll tell you why this is so important. So if you think about -- there's a demographic shift happening in the world, but certainly in the United States. Who has all the wealth today, the boomers? Who is the most technology adept today, the Gen Z-ers. But what's happening? That wealth is moving. So I talk to bankers all the time, that wealth is moving from the boomers through the X-ers and the millennials toward the Z-ers, who's starting the businesses today, who owns the business of today, millennials and Z-ers, right? And what do they want? They want to do all their banking through a digital presentation. They don't want to go drive to the branch. They don't want to have your really good coffee that you're serving in your branch. They want to do things digitally. And so bankers are trying to figure out how do we make that shift to be able to present everything through a digital presentation layer to our customers because they have to. The expectation of the customer is changing because the demographics are changing. And that includes lending, right? Commercial lenders love the idea that borrowers will come into their branch and sit down with them and have that conversation. Well, a millennial who's starting a business, they don't want to drive to the branch. They want to be able to do that through a digital presentation. And if your bank won't do it, they'll find somebody who will. And so we talk all the time to bankers about this need to move from the traditional way of doing business to accommodate the customer of the future, and digital is the key cog in that wheel.

Super helpful. I guess shifting gears, maybe wanted to talk a little bit about Payrailz, the acquisition that you recently made. What does Payrailz do? And like what does it bring to Jack Henry? How does it elevate your products?

Yes. So Payrailz, we acquired in September. We announced the acquisition in September, a little tiny company. And if you know anything about Jack Henry, you know that for years, we were known as a serial acquirer. We were doing many deals a year for a long time of 2004 to 2015. I think we did 35 acquisitions. Haven't seen a lot of opportunity in the last few years with valuations where they were. IPOs were happening like crazy. I know there were companies that were going public that really had no business going public, but they did because they could. And so us finding opportunities to do acquisitions during the last several years have been pretty challenged. But the environment has changed and we're seeing more opportunity now. And so Payrailz is one that we've been following for quite some time. And the reason we liked what they were doing is, number one, they created their entire platform on the public cloud. So it's public cloud native, totally consistent with our long-term strategy to make sure everything we are offering is public cloud native. So that was a positive. Number two, we were -- and kind of tied to that, we were faced with the idea of rewriting our Bill Pay platform. We have thousands of FIs on our Bill Pay platform. We're one of the largest providers out there, but we were going to have to rewrite that platform to move it to the public cloud. Well, if we do the Payrailz acquisition, we have a public cloud native solution. We can start to move those customers without having to do a rewrite. So that was attractive to us because that would have been a long time and long-term investment for us. But the other thing about Payrailz is they had functionality that we didn't have. So they had a P2P component in their platform that was really attractive to us, partly because there is demand for P2P, person-to-person payments. Zelle has not been -- Zelle is not popular among bankers. Zelle is perceived as being a little clunky. It's perceived as being expensive. And there's this requirement that for me to send you money, we both have to be in network, on the Zelle network. And so a lot of bankers weren't thrilled with that. And so with Payrailz, we have an option that is a competitor to Zelle, and you don't have to be in network in order to send money. So my bank is a Payrailz customer, I can send you money regardless of whether your bank is Payrailz customer, so we don't have to both be on the same platform. That was attractive to us. Additionally, Payrailz has had an account-to-account transfer functionality that we really like. So you have accounts that are multiple banks you want to move money back and forth between your banks. We can do account-to-account without the -- both banks being part of the platform. And then B2B payments is on this platform. And B2B electronic payments is an area of the future that we see as a growth opportunity. Today, the people that are in the electronic B2B payment space, they're printing lots and lots of paper checks and mailing paper checks. Why are they doing that? Because the commercial business can't accept an electronic transaction. They need either the paper check or an image to do the reconciliation on the back end. But we see that evolving. We see commercial businesses modernizing. And so the opportunity to be in the B2B payment space in the future electronic payment space, is something that was attractive to us as well. So a variety of reasons that justified that acquisition. And of course, it's a little tiny company. We've got a lot of work to do to complete the integration, but that will be kind of the foundation for a lot of what we do in payments for the future because we think they have built a really nice platform for us to work on.

On the P2P part specifically, are you seeing inbound from banks that don't want to use to Zelle and are looking for an alternative solution?

Yes. I don't know that I would classify it as inbound sales opportunities as much as just complaining. There's just a lot of complaints out there about the platform. And it's a good platform, but I think what bankers are just concerned about is the things I highlighted the -- not only the cost, but the fact that both banks have to be a network in order for you to send money, well, that limits the number of opportunities for people to send money back and forth. So it's mostly been complaints as opposed to, hey, I'm ready to sign on the dotted line and buy your solution because Payrailz is -- it's a real small platform, not very widely distributed. So we still have to prove that solution as a really competitive solution, but we see the opportunity there.

Got it. Another topic that gets a lot of attention is FedNow. We know it's expected to be rolled out middle of this year. But really for banks to get access, they will need to work with their core providers like yourselves. So maybe you can make us a little bit smarter on what needs to happen once FedNow is launched in order for banks to actually be able to use that functionality.

Yes. We're excited about FedNow. So we've been working with the Fed for several years. As far as I know, we were the first provider at the table with the Fed, working on the design and working on kind of scoping this 4 years ago or something like that. We announced on the earnings call that we will be the first provider to go live with FedNow. In fact, I was just on the phone with Lael Brainard, 1.5 weeks ago or so. So she's Vice Chair of the Fed. She owns the FedNow project for the Fed. And so we were talking about this summer and rollout and all that kind of stuff. So we're very excited to be the first provider to go live. We will go into beta. We think in May. It may be June. We'll go into beta with the Fed. And then it's normally 90 days, maybe 120 days of beta process. Before we'll actually go general availability with the Fed. But the Fed is very committed to this platform. They believe it's a revolutionary technology for them. their traditional solution is a solution called Fedwire, which is an old technology. I mean back in the day was when I was installing banks, and this is a long time ago, Fedwire was a solution that we installed back then. So it's been around for a long time. So they're really excited about this technology as a new platform for them to facilitate real-time payments and really be a player in that space. So -- there's still a lot of work to do because we've got to get through beta and got to really get customers live. But we believe, and the Fed believes there's a lot of opportunity for that business because every bank and credit union has some kind of relationship with the Fed. They already have a relationship. And so it's kind of natural for them to adopt this as opposed to somebody having to go in and sell them on this. It's natural for most banks to adopt this platform once it's proven out. And so they see it as a big opportunity for us -- we sell the customer, what we call our PayCenter hub. And now they can connect any real-time payments option to the PayCenter hubs. So we sell it once, and they connect up to that hub. So most of them already have the clearinghouse real-time payments connected in there. They might have Zelle in there. They'll have FedNow into the payment hub. So for our customers, it's a pretty quick and easy implementation process as long as they have purchased the PayCenter hub from us. We do that integration work once and then they can just connect up all these different things to that hub. Most of our competitors, as we understand it, are selling single-point integration. So if you have the clearing house, you have integration written to the clearing house, now you want the Fed, they sell you another integration to the Fed, not nearly as efficient a model for our customers as what Jack Henry has created. So we're pretty excited about the opportunity. But again, a lot of work to be done yet between the 2 organizations.

And is that generating demand for Payment Hub?

Not yet because people are still waiting to see what happens with the Fed, but I believe it will -- I know it will create demand as we get that rolled out and customers really start to understand what the real opportunity is with FedNow. .

And once it's rolled out, is that a meaningful revenue opportunity for Jack Henry?

I don't think it will be a huge needle mover. I mean, it certainly is transaction revenue for us. So we sell the hub and then we get transaction revenue in those transactions. But it's not going to be some great big needle mover for us. We're trying to be reasonable in our pricing fair to our customers, but it certainly is a revenue stream for Jack Henry.

So I want to give the audience an opportunity to ask questions. We have one right there.

David, thank you again for being here. Could you talk a little bit about blockchain and how you think that may be integrated into your operations? And what you think is the likelihood for use cases going forward?

Yes. So blockchain is an interesting topic. Blockchain, people think blockchain was new 5 years ago. It's not. It's been around for many, many years. And so several years ago, we did a lot of study about blockchain and the technology and where it applies and where it doesn't. The interesting thing to me was my learning back then, and it's been reinforced since then is how inefficient the blockchain technology is. So it's really great for certain use cases, and it's really bad for other use cases because of the speed of the blockchain, right? Because the whole concept in blockchain is distributed ledger, you're repeating the same transaction over and over and over again. So I remember a few years ago, 1 company did a study on drive-up ATM transactions. And what they concluded at the time was -- if you were -- if the ATM was driven entirely by blockchain, if you drove up to the ATM and started this transaction, your money would pop out 7 minutes later because it's just so slow, right? So what we've determined is there are a lot of use cases that are really bad for blockchain. But there are some that are great. So international money movement, for example, replacing international wires, great potential opportunity for blockchain. Real estate transactions, the idea of proof of title and immutability of the data that's there, great application for blockchain. So we're following -- I think we're very well educated on where blockchain works and where it doesn't. And we're following the industry as far as what makes sense and what doesn't make sense. Jack Henry is not trying to be the innovator in that because if you look at the primary use cases, we need to be the follower. We need to see what gets adopted in the industry, and then we'll deploy technology to support that as opposed to trying to be the innovator and say, we're going to define the standard for real estate transactions. That is not our job. That's not what we do. That's not going to be our position, but we're totally prepared as the industry continues to evolve, as those certain use cases start to use blockchain as the underlying technology, we're there to support that as it makes sense.

Great. Any other questions in the audience? Yes. So we have just time to finish a couple more that I have. So I guess quickly touching on M&A and capital allocation priorities. Are there areas that you're looking to supplement your technology and modernization strategy with?

Yes. So first off, when we talk about capital allocation. So we're totally committed to our dividend policy. We just increased our dividend again here. We announced it last month. We are -- we do not have a stated share repurchase policy. We repurchased shares opportunistically. So generally try to offset dilution from share grants that go to employees, but we don't have a stated share repurchase commitment. Our real preference is M&A. And again, we have a long history of successfully performing M&A transactions, integrating them into our company. The challenge that we have when it comes to M&A is we don't really have any holes in our product suite. We have a very complete product suite, more than 300 different solutions at Jack Henry. Many of them are best-of-breed solutions. And so it's not that we have some big holes in our product suite. So normally, what we're looking for, and Payrailz is an example of it, and I could cite a whole bunch of others, we're normally looking for we maybe have a product in market that's good, and there's somebody out there who's doing something similar. And maybe there's a little bit of overlap, but it's very complementary to what we do. We'll acquire this company, put it together with what we have and create a whole new store, 1 plus 1 equals 3 type of scenario. We've done that over and over and over again. So it's normally not us saying, "Oh, we got to go find something to solve this problem." Instead, it's us to find things that we can put together and create that new story. And the reason we've been so successful at that, I think, is when you do that and you're kind of creating an ad and a story is something you already have, we can hand it to our sales teams. We have great sales coverage across the country. Hand it to the sales teams, and they could start to go sell that pretty quickly and start to get the revenue engine going for Jack Henry. So we've done that time and time again. Those are the things we we're still looking for those scenarios. I believe, as I said earlier, valuations are starting to look a little more palatable. So hopefully, we'll be able to find some other nice deals to fold into the family.

Great. Just one last one. You've talked about a lot of opportunities today, but opportunities never come without risk. So when these 2 or 3 things that you worry about the most?

Yes. So I get the question once, well, what keeps you awake at night? And I always say, I sleep pretty well. Nothing is keeping me awake at night. I will tell you, when you're running a company like I am, you're a large financial technology provider, U.S.-based, you can never stop thinking about the bad guys out there that are trying to take advantage of the U.S. financial system. So cyber is always top of mind. It's a big area of focus for us. We invest a lot of money in that area. So I would say that's always top of mind. I get asked a lot about competitors that are coming into the space, upstarts and so on. Most of them are having no success, and part of that is because the regulatory environment in the U.S. is really, really hard. Saying you have a cool technology and thinking you're going to disrupt the banking space. Well, that's great until you understand how hard it is to operate in the banking space. It is a very difficult environment. If you don't understand the regulatory environment, it's almost impossible. And so I don't spend a lot of time worrying about them, but I sure pay attention to them. We're always watching what's happening as far as new technologies and new companies in our space.

Great. I think with that, we're just out of time. Thank you, David. Thank you for joining us. Thank you for the support.

You bet. Thank you, Vasu.